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Christopher Gilkerson SVP, General Counsel Charles Schwab &
Co., Inc. 211 Main Street 211MN-05-103 San Francisco, CA 94104 Tel:
(415) 667-0979 Email: [email protected] July 20,
2015 Submitted Electronically – [email protected]; [email protected] Office
of Regulations and Interpretations Employee Benefits Security
Administration Room N-5655 (RIN 1210-AB32) and Suite 400 (ZRIN
1210-ZA-25) U.S. Department of Labor 200 Constitution Avenue NW
Washington, DC 20210 Re: Definition of the Term “Fiduciary” (RIN
1210-AB32)
Best Interest Contract Exemption (ZRIN 1210-ZA-25) Principal
Transactions in Certain Debt Securities Exemption (ZRIN
1210-ZA-25)
Dear Sir or Madam: Charles Schwab & Co., Inc., (“Schwab”),1
on behalf of itself and its affiliates, appreciates the opportunity
to provide comments on the Department of Labor’s (“Department”)
regulatory proposal published on April 20, 2015, that would expand
the definition of fiduciary investment advice and propose new or
modified prohibited transaction exemptions (the “Proposal”).2
Schwab agrees with the Department that it is time to update the
definition of fiduciary investment advice under the Employee
Retirement Income Security Act of 1974 (“ERISA”) to better protect
retirement savers from conflicts of interest that can erode
savings, while still preserving choice and access to a broad range
of investing services necessary to meet diverse individual plan and
investor needs.
1 The Charles Schwab Corporation provides services with respect
to retirement and other benefit plans and accounts, as well as to
the participants and beneficiaries in such plans and to the account
owners, through its separate but affiliated companies and
subsidiaries, including Charles Schwab & Co., Inc., Charles
Schwab Bank, and Schwab Retirement Plan Services, Inc. Brokerage
products and services are offered by Charles Schwab & Co., Inc.
(Member SIPC). Trust and custody products and services and deposit
products are offered by Charles Schwab Bank. Schwab Retirement Plan
Services, Inc. provides recordkeeping and related services with
respect to retirement plans and the participants in those plans.
Charles Schwab Investment Management, Inc., a separate affiliate,
is the investment advisor for Schwab's proprietary funds.
2 Notice of Proposed Rulemaking –Definition of the Term
“Fiduciary”; Conflict of Interest Rule--Retirement Investment
Advice, 80 Fed. Reg. 21928 (Apr. 20, 2015).
mailto:[email protected]:[email protected]:[email protected]
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We are concerned, however, that without making some key changes
in the final rule the benefits of the Proposal will not be realized
and instead there will be a dramatic reduction in the assistance
available to retirement savers to make smart retirement planning
and investing decisions and in the information available to plan
sponsors to make informed plan decisions. This would result in much
larger than anticipated negative impacts and costs, harming the
very retirement savers that the Department intends to protect
through the Proposal. To make sure this does not happen, the
Proposal should be re-proposed with changes, adopted as an interim
final rule, or published in some other meaningful way for
stakeholders to review before a rule is final and effective. I.
About Schwab, Our Clients, and Our Concerns Schwab is one of the
largest financial institutions in the United States with over $2.5
trillion under custody. Schwab’s business model offers high-value,
low-cost investment services to retirement savers and the
independent investment advisors, employers, and third party
administrators who serve them. Together with its affiliates
including Charles Schwab Bank and Schwab Retirement Plan Services,
Inc., Schwab provides a full range of advisory, brokerage,
recordkeeping and trust/custodial services for retirement plans,
participants and beneficiaries, and IRA owners. Schwab’s affiliates
Charles Schwab Investment Management, Inc. and Charles Schwab Bank,
offer mutual fund, exchange traded fund and collective trust fund
investment vehicles. Schwab serves a wide range of retirement
savers including 3.2 million IRAs in our retail business alone.
Sixty percent of all retail households at Schwab have at least one
IRA. Over 7,000 independent registered investment advisors and
their clients choose Schwab to custody their brokerage and
retirement accounts and to provide trading and investment services.
Schwab websites with thousands of pages of information and
resources, over 300 branch offices, and national call centers
provide 24 x 7 service to retirement savers and the advisors and
third party administrators who provide support to them. While a
majority of our clients are self-directed investors who rely on
online tools, research, and education to make their own informed
investment decisions, a substantial and growing number seek
occasional individualized guidance or ongoing investment advice for
a reasonable fee. Of critical importance is that the final rule
preserve: (1) access to fiduciary investment management services
that help millions of retirement savers achieve better retirement
outcomes today and are already subject to the full protections of
ERISA and the Investment Advisers Act (“Advice Programs”) and (2)
access to online tools and resources that millions of retirement
savers rely on today to make informed investment decisions on their
own.3 We describe below Schwab’s support for key elements of the
Proposal, and then the specific measures we recommend be adopted to
ensure that negative, unintended consequences are avoided:
3 The changes we recommend below and in the attached redline
mark-ups of the Proposal’s text harmonize the new rule with the
Investment Advisers Act disclosure requirements and FINRA’s rules
governing IRA rollover conversations and online tools for
self-directed investors, thereby avoiding inconsistent
standards.
2
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A. The final rule must enable recommendation of Advice Programs
in the client’s best interest, without imposing unnecessary burdens
(page 6);
B. The final rule must preserve online tools and resources for
self-directed investors, without such assistance being viewed as
fiduciary investment advice (page 8);
C. The final rule must permit providers to make clients aware of
services, including rollovers, without such information being
viewed as fiduciary investment advice (page 10);
D. A clearer line should be drawn between sales and advisory
activities, so that plan sponsors and retirement savers can make
informed decisions in selecting service providers (page 14);
E. The Department should allow customary investment platform and
fund assistance practices to continue without fiduciary
implications (page 15);
F. The Department should clarify that routine valuation
practices are ministerial rather than fiduciary activities (page
16); and
G. The Department should remove unnecessary and burdensome
elements of the Principal Transaction Exemption (page 17).
We conclude by suggesting certain pragmatic measures for
implementation in light of the Proposal’s complexity. II. Schwab
Supports the General Intent of the Proposal We agree with the
Department on many issues of critical importance.
• We agree with the Department regarding the importance of
tax-deferred retirement savings to the retirement security of U.S.
workers, and the importance of education and expert advice in
helping guide the decisions necessary to a successful
retirement.4
For many American workers, their retirement plan is their only
or primary source of retirement savings.5 Alarmingly, a sizeable
portion of American workers have virtually no money in
4 U.S. Department of Labor, “Fiduciary Investment Advice
Regulatory Impact Analysis” (“Regulatory Impact Analysis”),
available online at
http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf at 1, 108
(Apr. 14, 2015). The Regulatory Impact Analysis is summarized at 80
Fed. Reg. 21951.
5 In a 2010 survey 7 out of 10 survey participants reported that
their current 401(k) plan was either the only source or the largest
source of retirement savings. Schwab Retirement Plan Services, Inc.
in conjunction with Koski Research Inc., The New Rules of
Engagement for 401(k) Plans (2010).
3
http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf
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savings and investments; understandably, American workers are
very concerned about this issue.6 Studies show that when plan
participants receive help, they do significantly better in saving
and investing for retirement.7 The Department understands this.
When announcing the Final Rule implementing the Pension Protection
Act of 2006 investment advice provisions, the Department recognized
the significant losses associated with flawed investment decisions
that are at least partially caused by ERISA prohibitions.8 To
encourage more retirement savings for all Americans, Schwab fully
endorses regulatory initiatives that serve to expand access to
guidance and education services to help investors.
• We support a new definition of fiduciary investment advice
that “better protects plans, participants, beneficiaries, and IRA
owners from conflicts of interest, imprudence, and
disloyalty.”9
We agree with the Department that it is critical to address
conflicts of interest that result in quantifiable harms to
retirement savers, including “underperformance of broker-sold
mutual funds…due to loads that are taken off the top and/or poor
timing of broker sold investments” and “excessive trading and
associated transaction costs and timing errors (such as might be
associated with return chasing)….”10 We agree that parties
providing fiduciary investment advice to retirement plans, to the
participants and beneficiaries in such plans, and to IRA owners
6 Nearly 80% of participants in the Schwab/Koski study lacked
confidence that they will have enough money for retirement. Id.
According to the 2015 Retirement Confidence Survey conducted by the
Employee Benefit Research Institute, almost two-thirds of workers
reported that they felt behind schedule regarding planning and
saving for retirement, although the Survey noted that “this
assessment may not be based on a careful analysis of their
individual circumstances.” Employee Benefit Research Institute
(EBRI), The 2015 Retirement Confidence Survey: The Importance of
Having a Retirement Plan (March 2015).
7 A 2014 paper from Morningstar Investment Management showed
that approximately 87% of participants enrolled in an advisory
program increased their savings deferral rates after receiving
recommendations to save more, and on average, participants
increased their savings deferral rates by approximately 2% of
salary. The percentage of participants that increased their savings
deferral rates was determined by comparing each participant’s
savings deferral rate prior to and after using the Morningstar®
Retirement ManagerSM service. David Blanchett, Morningstar, Inc.,
The Impact of Expert Guidance on Participant Savings and Investment
Behaviors” (Aug. 20, 2014).
8 The Department stated as follows in 201l: “With the growth of
participant-directed retirement savings accounts, the retirement
income security of America’s workers increasingly depends on their
investment decisions. Unfortunately, there is evidence that many
participants of these retirement accounts often make costly
investment errors due to flawed information or reasoning…these
participants may make financial mistakes which result in lower
asset accumulation, and thus final retirement account balances, for
these individuals and/or result in less than optimal levels of
compensated risk. Financial losses (including foregone earnings)
from such mistakes likely amounted to more than $114 billion in
2010…These losses compound and grow larger as workers progress
toward and into retirement. Such mistakes and consequent losses
historically can be attributed at least in part to provisions of
the Employee Retirement Income Security Act of 1974 that
effectively preclude a variety of arrangements whereby financial
professionals might otherwise provide retirement plan participants
with expert investment advice.” 76 FR 66136 at 66151 (Oct. 25,
2011).
9 80 Fed. Reg. at 21929.
10 Id. at 21930.
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should act in the best interest of their clients and be held
responsible if they fail to do so. Retirement savers deserved to be
protected from the abuses of bad financial providers.
• We agree with the Department’s goal of preserving beneficial
business models for the delivery of investment advice.
The Department states that it seeks to:
preserve beneficial business models for delivery of investment
advice…as long as they are willing to adhere to basic standards
aimed at ensuring that their advice is in the best interest of
their customers. Rather than create a highly prescriptive set of
transaction-specific exemptions, the Department instead is
proposing a set of exemptions that flexibly accommodate a wide
range of current business practices, while minimizing the harmful
impact of conflicts of interest on the quality of advice.11
We appreciate the Department’s acknowledgment that many current
business models work well and should not be disrupted. It is
critical that variations in business structures be preserved to
give retirement plans and investors choice and access to different
products, services and fee models based on their own unique
situation and goals. Not all retirement investors are the same, and
they should not all receive the same services nor pay for services
in the same way. The Department has recognized the importance of
such variations in service and fee models, stating that “investment
firms may be more willing to differentiate the level of services
and charge fees accordingly…This is likely to positively affect
investors…because investors can have more choices on the level of
services and fees based on their needs.”12 For example, we agree
that the “difference in comparative advantage makes robo-advisers
and traditional adviser firms complement rather than substitute
[for] each other.”13 Recently Schwab launched a “robo-advice”
service for those clients for whom it is appropriate, and makes a
variety of other solutions available to investors who would like
more traditional forms of advisory services. III. Key Concerns with
the Proposal Although Schwab agrees with the Department’s laudable
goals, we have significant concerns, and therefore provide a number
of suggestions for changes that would address conflicts arising
from the provision of fiduciary investment advice to plans and
retirement savers, while ensuring that those in need of education
and advice are not harmed as a result of unintended
consequences.
11 Id. at 21929.
12 Regulatory Impact Analysis at 231 (Apr. 14, 2015).
13 Id. at 231. 5
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A. The final rule must enable recommendations of Advice Programs
in the client’s best interest, without imposing unnecessary
burdens
Under the Proposal, a recommendation as to the management of
securities and a recommendation of a person who gives investment
advice would be fiduciary activities. With an expanded definition
of fiduciary activities, it is critical to still be able to offer
retirement savers a choice of advice products and services to meet
their individual needs, from simple and low cost to more complex
and higher cost. Many service providers such as Schwab offer an
array of fee-based programs: discretionary and nondiscretionary
advice services, and affiliated and third party money managers who
help clients invest in diversified or tactical allocation
portfolios of ETFs, mutual funds and/or individual stocks and
bonds. This includes referrals to independent investment advisors
for discretionary management services that are already subject to
the full protections of ERISA and the Investment Advisers Act. This
also includes managed account or “wrap” programs which combine
investment management with brokerage commissions for one
asset-based fee. Collectively, these can be referred to as “Advice
Programs.” Schwab alone offers 201 different portfolios or
strategies (many managed by third party advisors) on 5 platforms
for retirement savers to choose from, plus the opportunity to be
referred to 178 independent registered investment advisors. With
this choice comes the necessity for a financial consultant to
assess the client’s needs to recommend the Advice Program that is
best for that particular client. Recommendations to and under these
programs are already subject to the Investment Advisers Act of 1940
and its fiduciary best interest standard. In addition, independent
registered investment advisors, typically small businesses who
serve clients in their local communities, provide financial
planning and investment management services that integrate
retirement accounts with a household’s other accounts and assets
for holistic wealth management. They often recommend that a new or
existing client consolidate retirement assets, for example by
rolling over 401(k) plan holdings into an IRA, to enable
comprehensive management of the client’s retirement and
non-retirement accounts in one overall portfolio or household view.
As fiduciaries, independent investment advisors’ financial planning
and investment management activities are also subject to the
Investment Advisers Act of 1940 and its fiduciary best interest
standard. These too can be referred to as “Advice Programs” for
purposes of considering an appropriate carve-out or exemption under
the Proposal. Schwab agrees with the Department that the
recommendation of an Advice Program should be in the client’s best
interest. However, the Proposal does not provide a clear carve-out
or appropriate prohibited transaction exemptive relief necessary
for the direct and indirect compensation a fiduciary or an
affiliate receives as a by-product of a retirement saver entering
an agreement for or enrolling in an Advice Program.
The newly proposed Best Interest Contract (“BIC”) exemption14
only covers compensation received for services provided “in
connection with a purchase, sale or holding of an Asset.”15
Recommendations with respect to Advice Programs would not
constitute advice with respect to
14 Notice of Proposed Best Interest Contract Exemption, 80 Fed.
Reg. 21960 (Apr. 20, 2015).
15 Id. at 21987.
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an Asset, so the BIC exemption is not on its face available in
this context. Even if the BIC exemption was available, certain of
its requirements would be impossible to satisfy in the context of
Advice Program recommendations. For example, advisors are required
to disclose under the BIC exemption a detailed amount of
information to retirement savers regarding the “Total Costs” of
each Asset—the acquisition, ongoing and sales costs with respect to
the Assets and the price at which these were purchased or sold.
This information is not relevant to Advice Programs. In fact,
consistent with their fiduciary duty, discretionary money managers
cannot disclose publicly ahead of time the investment they are
planning for the accounts that they manage.
Similarly, the Pension Protection Act exemption under ERISA
Section 408(g),16 is not available on its face, as it only
specifically extends to the provision of nondiscretionary
investment advice (i.e., securities buy and sell recommendations)
and not recommendations as to management or referrals to Advice
Programs.17 If simply carving-out recommendations of Advice
Programs from the definition of “investment advice” is not
feasible, Schwab suggests two non-mutually exclusive alternatives
to address this gap. First, a modified BIC exemption could be
adopted that is more tailored and relevant to the recommendations
of Advice Programs. To address potential conflicts, the proposed
exemption would reflect the same “Impartial Conduct Standards” and
other contractual requirements as contained in the BIC exemption,
to be incorporated into the investment management or Advice Program
agreement that must be executed after the recommendation for
investment management occurs, but prior to the actual investment
through the advisory program.18 As a further mitigation measure to
address potential conflicts, this tailored exemption could require
that any representatives making an Advice Program recommendation be
compensated on a level basis, to remove the incentive to recommend
an advisory solution that would produce higher compensation to the
party delivering the advice recommendation. Investment Advisers Act
disclosures (the Form ADV Part Two) that already mandate
disclosures of advisory fees and conflicts, would substitute for
the Asset-based and product-related disclosures of the current BIC.
Schwab’s proposed modified BIC exemption, showing changes to the
proposed BIC exemption as tailored to reflect recommendations of
Advice Programs, is attached as Exhibit 1.
16 Public Law 109-280, 120 Stat. 780 (Aug. 17, 2006), Sec.
601.
17 Schwab relies on this Pension Protection Act exemption today
for the advice it delivers within its fee-based non-discretionary
advisory program. 18 We recommend that the Department clarify that
under both the proposed BIC exemption and a modified BIC exemption,
the advisory agreement be entered into between the advice provider
and the advice recipient. The Department should further clarify
that the advice recipient would be the plan sponsor, rather than
the participant, in the case of participants defaulted into an
investment option that is a qualified default investment
alternative under ERISA Section 404(c)(5) and 29 CFR 2550.404c-5
(“QDIA”). A QDIA is an investment option selected by a plan sponsor
under a retirement plan to invest the assets of a plan participant
who makes no investment decision. Plan sponsors complying with DOL
QDIA regulations will avoid liability for losses resulting from a
participant’s investment in the QDIA. Due to the nature of a QDIA
(i.e. that participants do not select the option, but rather
default into it as a result of their inaction), the plan sponsor
should be the party entering into the advisory agreement.
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Second, the Department could revise its regulation under 29 CFR
2550.408g-1, promulgating the statutory prohibited transaction
exemption under ERISA Section 408(g). ERISA sections 408(b)(14) and
408(g) provide an exemption for the receipt of compensation
resulting from ERISA section 3(21)(A)(ii) advice recommendations
made as part of an eligible investment advice arrangement. At the
time these statutory provisions were enacted in 2006, the current
definition of investment advice – which refers to investment (but
not management) recommendations – had been in place for more than
20 years. Accordingly, the Department’s final rule under ERISA
section 408(g) tailored the scope of relief available to
non-discretionary investment recommendations.19 In light of the
Department’s proposal to expand the 3(21)(A)(ii) definition of
fiduciary investment advice to include management recommendations
(such as Advice Programs), we urge the Department to update the
408(g) regulation to reflect this change.
Our suggestion is for the regulation to track the new investment
advice definition under the Proposal by covering (1) investment
recommendations (as it does today), (2) investment management
recommendations and (3) recommendations of persons to provide
investment advice for a fee or to manage plan assets. This can be
accomplished by clarifying and expanding the meaning of a
“designated investment option” and of an “investment option” to
include both a designated investment alternative and an “Advice
Program.” The term Advice Program captures a service arrangement
where someone recommends to a plan participant or beneficiary or
IRA owner a fee-based nondiscretionary or discretionary investment
management service. Collectively, these changes preserve the
protections currently in place for retirement savers while
providing relief for recommendations of Advice Programs.20 Schwab’s
proposed modification to 29 CFR 2550.408g-1 is attached as Exhibit
2.
B. The final rule must preserve online tools and resources for
self-directed investors, without such assistance being viewed as
fiduciary investment advice
Many investors do not wish or cannot afford to pay for advisory
services and elect to make their own investment decisions. Millions
of retirement savers are included in this large category of
self-directed investors who rely on online tools such as
calculators, screeners, portfolio analyzers, planning tools and
investment research on stocks, bonds, mutual funds and ETFs. The
research tab on schwab.com alone averages 95,000 page views a day.
The current Proposal’s expansive definition of recommendation,
without clarification through the investment education carve-out,
could place at risk the availability of these online tools and
resources for self-directed investors.
19 Final Rule, Investment Advice—Participants and Beneficiaries;
29 CFR 2550.408g-1; 76 Fed. Reg. 66136 (Oct. 25, 2011). 20 A
recommendation to enroll in an Advice Program such as a wrap
account or to hire a registered investment advisor to manage
retirement assets is non-discretionary, meaning that the retirement
saver can choose whether or not to accept the advisory service. In
this way the suggested change is consistent with Section
408(g).
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Subsection (6)(iv) of the investment education carve-out for
“interactive investment materials” excludes materials that “include
or identify any specific investment alternative available or
distribution option available under the plan or IRA, unless such
alternative or option is specified by the participant, beneficiary
or IRA owner.”21 Because the “unless” clause could be read
narrowly, 6(iv) should be harmonized with the education carve-out
for Plan information under subsection (6)(i), which provides that
only references “to the appropriateness of any individual
investment alternative…for the plan or IRA, or a particular
participant or beneficiary or IRA owner”22 fall outside of the
carve-out. Failure to make this clarification effectively would bar
millions of retirement savers from using valuable “do it yourself”
tools that provide investment ideas, making it more likely that
they would need to pay a fee for advice or rely on product
sellers.23 It will seem nonsensical to investors that they can use
such tools to make informed investment decisions in their taxable
accounts but not their retirement accounts. Harmonizing the
carve-out for online resources and tools also would be consistent
with the FINRA guidance the Department has borrowed for its new
definition of “recommendation,” NASD Notice to Members 01-23
(“Online Suitability”).24 For well over a decade FINRA members such
as Schwab have provided self-directed investment tools pursuant to
this longstanding interpretive guidance that distinguishes an
individual recommendation from a general communication. The
Department states in the Proposal that the FINRA guidance “provides
useful standards and guideposts for distinguishing investment
education from investment advice under ERISA.”25 The Proposal
specifically solicits comments on whether the Department should
adopt some or all of the FINRA standards “in defining
communications that rise to the level of a recommendation for
purposes of distinguishing between investment education and
investment advice under ERISA.”26 Schwab urges the Department to do
so.
Many of the online tool examples provided under the 01-23
guidance are not recommendations because they are not
particularized communications to individual investors. Similarly,
other FINRA rules treat equity research and ratings for individual
stocks, whether online or otherwise, as educational and not
investment advice because such research is not individualized to
the needs of any participant or account holder.27 In contrast,
because such communications may list
21 80 Fed. Reg. at 21959.
22 Id. at 21958. 23 These tools are not product sales and do not
purport to make individualized recommendations. Investors often use
the online tools in one session and make their investment trading
decisions in another. The protections and disclosures the BIC
exemption mandates, therefore, are neither feasible nor necessary.
The result would be that firms like Schwab, citing inability to
comply with the Department’s rule, would have to exclude IRAs and
other retirement accounts from using these tools intended for
self-directed investors.
24 80 Fed. Reg. at 21938 (adopting FINRA’s definition of
“recommendation”).
25 Id. at 21938.
26 Id. at 21938.
27 In 2002, the NASD adopted Rule 2711 (Research Analysts and
Research Reports) to improve the objectivity of analyst research
and to mitigate potential conflicts of interest. The Rule remains
fully in effect and has been
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individual securities they appear not to be covered by the
Department’s proposed education carve-out for interactive
investment materials.
Under FINRA’s guidance a recommendation is distinguished from a
general communication based on whether the content, context, and
manner of presentation indicate a call to action for the particular
investor. Merely generating a list or mentioning specific
investments or securities – which is common to many tools such as
screeners, portfolio analyzers, and research – is not the test.
Including tools that an investor can use to produce a list of
securities or to research stocks, mutual funds, and ETFs in the
education carve-out (provided that an individualized recommendation
is not directed at the particular investor) is critical to allow
self-directed investors to continue to make informed decisions on
their own.
Consistent with FINRA’s guidance under 01-23, the Department
should clarify that the education carve-out includes research and
self-directed tools that list potential investments as investment
education provided that they do not make “reference to the
appropriateness of any individual investment alternative for the
plan or IRA, or a particular participant or beneficiary or IRA
owner” consistent with (6)(i).
Schwab’s proposed revision to the investment education carve-out
reflecting this and other necessary modifications (described below)
is attached as Exhibit 3.28
C. A final rule must permit providers to make clients aware of
services, including rollovers, without such information being
viewed as fiduciary investment advice
Education is critical to informing retirement savers about a
variety of important issues, including the need to save for
retirement, how much to save, whether to roll over a distribution,
and the savings and investment options available through their
employer retirement plan or IRA. One of the most problematic
aspects of the Proposal is whether such general, informative
communications will be treated as a “recommendation” and fiduciary
advice, even where
incorporated into FINRA’s rulebook. It applies to “research
reports,” which are defined as written communications that include
“an analysis of equity securities of individual companies or
industries, and that provides information reasonably sufficient
upon which to base an investment decision.” Rule 2711, amongst
other requirements, places restrictions on the relationship between
research departments and investment banking departments, prohibits
the promise of favorable research as well as certain forms of
research analyst compensation, requires disclosures of ownership
and material conflicts of interest in research reports, and
restricts personal trading by research analysts, including
participation in securities which are the subject of published
recommendations. In November 2014, FINRA proposed adopting NASD
Rule 2711 with some modifications as new FINRA Rule 2241. The
proposed rule is pending as of June 22, 2015, but would encompass
debt research and analysts, would require member firms to adopt
written policies and procedures designed to enforce the
requirements of the rule, and would further restrict interactions
between research and investment banking departments.
28 Many firms provide online bond market access for
self-directed investors. This service combines screeners, research,
tools, inventory availability, and trading ability. The ability of
firms to deal with their clients on a principal basis is necessary
to maintain inventory, provide access to a range of bond issues,
and deliver best execution. The final rule should make clear that
the proposed exemption for principal transactions in debt
securities is not needed for online tools for investing in fixed
income securities, provided that the service does not provide an
individualized recommendation to a particular plan, participant, or
IRA account owner.
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specific recommendations are not provided regarding a
distribution or rollover or how to invest plan or IRA assets. We
agree with the Department when it states that the Proposal has the
potential to define more clearly the “boundaries between fiduciary
advice and education [which] may improve access to plan participant
and IRA investor educational services.”29 Further, the Department
explains that the intention of the “new proposal [is to] exclude
from fiduciary status education that does not include personal
recommendations.…” 30 With respect to call center delivery of
educational information on an individual basis, the Department
states that guidance from call center representatives that “doesn’t
include a specific recommendation and is limited to education”31
would continue not to be fiduciary advice and therefore “the new
proposal is likely to make call center guidance more available and
robust, not less.”32 Unfortunately details of the Proposal itself
contradict this laudable goal by substantively reducing the
educational information that can be provided:
• Under subsection (ii) (“General financial, investment and
retirement information”), materials must not address “specific
investment products, specific plan or IRA alternatives or
distribution options available…or specific alternatives or services
offered outside the plan or IRA.”
• Under subsection (iii) (“Asset allocation models”), the models
must not “include or identify any specific investment product or
specific alternative available under the plan or IRA.”
• Under subsection (iv) (“Interactive investment materials”),
the materials must not “include or identify any specific investment
alternative available or distribution option available under the
plan or IRA… unless specified by the participant, beneficiary or
IRA owner.”
Failure to facilitate the provision of factual information about
investment products as non-fiduciary education will erode
retirement savers’ ability to make informed distribution, rollover,
and investment decisions.
The Department’s intent is to protect retirement savers from
conflicts of interest “in connection with one of the most
significant financial decisions they [participants] make with
respect to their retirement income security.”33 Schwab agrees
wholeheartedly. The Department should take note that other
regulatory requirements already serve this purpose. Brokerage firms
that communicate
29 Regulatory Impact Analysis at 214 (Apr. 14, 2015).
30 Id. at 223.
31 Id. at 224. 32 Id. at 226. 33 Id. at 189 .
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the availability of IRA services and assist retirement savers
with respect to distribution options are already subject to FINRA
rules, including Regulatory Notice 13-45.34 This Notice mitigates
conflicts in providing rollover assistance, by requiring
representatives of member firms to provide information in a fair
and balanced manner under a variety of FINRA rules. Notice 13-45
states that participants have four distribution options available
(e.g. maintain assets in the plan, roll over to an IRA, roll over
to a successor plan if possible or receive a cash distribution) and
lists seven factors that may be of importance to a rollover
decision. Conformity with these practices is subject to FINRA
regulatory examination.
FINRA recognizes that “[s]ome firms and their associated persons
provide educational information to plan participants concerning
their retirement choices. Firms that permit educational information
only should adopt measures reasonably designed to ensure that the
firm and its associated persons do not make [individualized]
recommendations.”35 Schwab is one of those firms. Under our policy
and procedures, Schwab representatives provide rollover assistance
without making a recommendation. They describe each of the four
distribution options available upon the participant’s termination
of employment and discuss the seven factors listed by FINRA in
Notice 13-45, as applicable to the terminated participant’s
situation. A service provider like Schwab can also mention that it
has an IRA product and describe the features of such an IRA. The
Department should clarify that fiduciary advice does not result
under a fact pattern such as this one, where the provider does not
make an actual recommendation regarding the sale of specific plan
assets and/or the investment of specific IRA assets.
In the context of model portfolios, the Department’s rationale
is that “specific asset allocations that identify specific
investment alternatives function as tailored, individualized
investment recommendations, and can effectively steer recipients to
particular investments, but without adequate protections against
potential abuse.”36 We question the value of model asset allocation
information that provides participants and IRA owners with
information on diversified asset classes, but does not explain how
particular investment alternatives (which in the plan context, are
selected by the plan sponsor or other authorized fiduciary) fit
within such asset classes. We are also concerned that educational
materials could no longer describe the benefits of certain plan,
distribution and IRA features that have been found to improve
retirement savings—such as the benefit of third party savings and
investment services that help participants plan to reach their
retirement goals or the benefit of not cashing out a distribution
upon termination of employment. Communications regarding available
services, when done in a fair and balanced manner, provide
important information for plan sponsors and IRA owners to compare
options and providers. Changes to the education carve-out under the
Proposal are necessary to ensure that retirement plan sponsors and
retirement savers can continue to receive the information regarding
plan and account services and options, including distribution and
rollover information, necessary in order to make informed
decisions, consistent with the Department’s goal of improving
access to educational services.
34 FINRA Regulatory Notice 13-45 (“Rollovers to Individual
Retirement Accounts”) (Dec. 2013).
35 Id. at 5.
36 80 Fed. Reg. at 21945. 12
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We make two suggestions to balance the benefits of continued
provision of important educational information, with the
Department’s concern that such information be distinguished from
specific, individualized recommendations on the investment of plan
and IRA assets that should be governed by the conflict of interest
rules. First, the education carve-out (or the preamble to the final
rule) should draw a clearer line between education and advice. It
should provide concrete examples of situations where education,
rather than fiduciary advice, is provided, such as the following
(which are not intended to be all inclusive):
i. Factual information is provided to terminated employees with
respect to their distribution options in a balanced manner
describing the four distribution options available, listing the
factors that may be of importance to a rollover decision, and
describing the features of IRAs offered by the firm.
Negative consequence that will result if not deemed education:
Service providers will reduce or eliminate distribution support.
Without this information, terminated employees will be more likely
to make poor distribution decisions, such as taking a cash
distribution rather than retaining their retirement savings in a
tax-deferred plan or account.
ii. Factual information is provided to plan sponsors and
retirement savers regarding
plan and IRA investment offerings, including performance
information and asset values, where such information is not
individualized based on the plan sponsor’s or retirement saver’s
own individual situation.
Negative consequence that will result if not deemed education:
Plan sponsors and retirement savers will not have the information
necessary to make wise investment decisions. The adverse
consequences resulting from uninformed investment decisions will
outweigh the remote potential for conflict arising out of
investment informational content.
iii. Factual information is provided about the products and
services available through
a third party administrator or other service provider to
retirement plans and the participants and beneficiaries in such
plans, including investment products and services, where such
information is not individualized based on the particular plan or
participant/beneficiary circumstances.
Negative consequence that will result if not deemed education:
Service providers
will reduce or eliminate investment support and services, and
plan participants and beneficiaries will have less assistance in
planning and saving for retirement.
Second, we recommend that consistent with the language in
subsection (i) of the education carve-out, the language in
subsections (ii), (iii) and (iv) of the carve-out be revised to
state that information and materials regarding investment products
or alternatives and distribution options are educational as long as
the information and materials are “without reference to the
13
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appropriateness of any individual investment alternative or any
individual benefit distribution option for the plan or IRA, or a
particular participant or beneficiary or IRA owner.”37 The
modifications described above under the second recommendation are
reflected in Exhibit 3.
D. A clearer line should be drawn between sales and advisory
activities, so that plan sponsors and retirement savers can make
informed decision in selecting service providers
We appreciate the Department’s intent to not disrupt “a wide
range of common business practices”.38 However, the Proposal’s
broad definition of “recommendation” could encompass customary,
non-fiduciary sales and marketing activities, where there is no
expectation of a fiduciary relationship. This would have serious
consequences. The seller’s carve-out39 does not resolve this issue.
First, it is not clear that it is applicable to the sale of
services—under its terms, it is available only with respect to a
“sale, purchase, loan or bilateral contract.”40 Therefore, the
marketing and sales activities of service providers such as
brokerage firms, investment managers, plan recordkeepers and
trustees that include information or Request for Proposal (“RFP”)
responses describing investment options, plan or account features,
advisory services and rollover and distribution assistance
available if the service provider is retained, may not qualify for
the carve-out. Second, the carve out is only available with respect
to plan fiduciaries that the Department concludes have sufficient
“financial expertise” to understand that a sales pitch is being
made, as contrasted to a fiduciary recommendation in the plan’s
best interest. The Department bases its test of “financial
expertise” on the size of the plan, extending the carve-out only to
larger plans—those with at least 100 participants or $100 million
in assets. The Department states that “the overall purpose of this
carve-out is to avoid imposing ERISA fiduciary obligations on sales
pitches that are part of arm’s length transactions where neither
side assumes that the counterparty to the plan is acting as an
impartial trusted adviser, but the seller is making representations
about the value and benefits of proposed deals”41 and that it “does
not believe such a carve-out can or should be crafted to cover
recommendations to retail investors, including small plans, IRA
owners and plan participants and beneficiaries”42 because in part
these parties “are unable effectively to assess the quality of the
advice they receive.”43
37 Id. at 21958.
38 Id. at 21929.
39 Id. at 21957.
40 Id. at 21957. 41 Id. at 21941.
42 Id. at 21942.
43 Id. at 21942.
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We respectfully request that the Department reconsider its
reasoning. In our experience, it is not reasonable to assume that
small plan sponsors or retirement savers are any less financially
sophisticated and need any more protection than large plan
sponsors. For example, some small plan sponsors and retirement
savers are in the financial services, accounting, or legal
professions. In addition, financial expertise is not necessary to
understand when a sales or marketing pitch is being made as
compared to an individualized investment recommendation. Any gap in
such expertise can be addressed by requiring a clear, prominent
disclosure that states impartial advice or advice in a fiduciary
capacity is not being provided. Also, all retirement plans covering
employees are subject to ERISA’s fiduciary standards, whether the
plans are large or small, so the carve-out from fiduciary advisor
status in the plan context should not make a distinction based on
plan size. The limitation of the carve-out to large plan sponsors
is likely to have a harmful, disparate impact on small plans and
retirement savers. They will not have access to the same
competitive market information as large plans and will face
difficulty comparing services and fees across providers, likely
resulting in uninformed and adverse decisions with respect to
provider selection. In the plan context, larger plans will have
access to a wider array of providers and fee structures than
smaller plans. There is in fact a strong likelihood that service
providers will be unwilling to engage in sales conversations with
or respond to RFPs of smaller plans, as such conversations and
activities would be subject to fiduciary status. In the retirement
saver context, individual account holders will be disadvantaged by
the inability to receive information and compare account features
and costs across providers. In this case, it is our belief that the
conflicts and consumer protections the Department intends to
address by limiting the seller’s carve out to “large” plans is
outweighed by the potential harm this would cause to small plans
and retirement savers. Instead, a clear, prominent disclosure can
be required to mitigate the risk. On this basis, Schwab recommends
that the Department modify its approach to accommodate reasonable
marketing and business development activities by financial services
firms and their representatives for all plans and retirement
savers. This can be pursued in two ways. Under the first
alternative, we propose modifying the definition of
“recommendation” to exclude “hire me” conversations. In the second
alternative, we propose a new carve-out from the definition of
fiduciary advice. Under both alternatives, a service provider would
be permitted to describe the products and services it offers as
long as there is no statement about the appropriateness of any
specific investment product based on the individual circumstances
of the recipient. The service provider would also be allowed to
encourage prospective new clients to consider a professional
relationship by providing information about the service provider’s
qualifications, expertise and experience. The carve-out could
include a required disclaimer that the service provider is not
providing impartial investment advice or giving advice in a
fiduciary capacity. Our proposed language is attached as Exhibit
4.
E. The Department should allow customary investment platform and
fund assistance practices to continue without fiduciary
implications
We agree with the Department’s position that service providers
should be able to market and make available a platform of
investment options for plan fiduciary selection, as well as assist
with respect to such investment selection and monitoring, without
such activities being classified
15
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as fiduciary advice. However, we urge the Department to make
several modifications to address certain gaps in the Proposal. The
platform and fund selection and monitoring carve-out should apply
to all plans, not just participant investment-directed defined
contribution plans. Plan fiduciaries of defined benefit plans (and
similar non-participant-directed plans) need the same assistance in
this context for their direct investment selections as fiduciaries
of participant-directed plans. The Department does not explain the
reason for this distinction other than referring to the growth of
participant-directed individual account plans.44 We assume that
(4)(i) of the “selection and monitoring assistance” carve-out
(permitting the identification of investment alternatives that meet
objective criteria specified by the plan sponsor)45 includes
service provider suggestions of sample or hypothetical fund line
ups, based on objective criteria specified by the plan fiduciary or
its consultant. The term “objective criteria” should include
information concerning the plan’s existing fund menu For example,
this is relevant where the plan sponsor is considering a new
service provider and must evaluate and compare different providers’
investment platforms, including fees and expenses associated with
platform investment options. The Department should expand this
carve-out to permit the identification of investment alternatives
(and creation of sample or hypothetical fund line ups) based on a
service provider’s client base and trends in the marketplace, as
long as it is clear that: (i) the service provider is not providing
such information based on the individual circumstances of the plan,
(ii) the plan fiduciary must consider its own circumstances and
needs in selecting plan investments, and (iii) the service provider
is not given impartial investment advice or advice in a fiduciary
capacity.
F. The Department should clarify that routine valuation
practices are ministerial rather than fiduciary activities
Valuations are frequently performed as part of routine
administrative and investment functions. For example, plan benefit
calculations are required to process plan loans and distributions,
including qualified domestic relations orders. Retirement savers
and plan sponsors can access daily benefit valuation information
with respect to account and plan assets, and reports are furnished
on a routine basis that incorporate such valuation information. We
are concerned that these types of ministerial functions46 may
inadvertently be treated as fiduciary investment advice. Sponsors
of and service providers to collective trust funds, mutual funds
and other investment vehicles calculate and communicate net asset
values to participants and plan fiduciaries as part of routine
investment information. In these situations, the valuations are not
limited just to ESOPs, investment funds, or situations where
disclosure is necessary to comply with regulatory reporting or
disclosure requirements, as under the Proposal’s financial reports
and valuation carve-out.47 The Department should expand this
carve-out to clarify that routine
44 Id. at 21943.
45 Id. at 21958.
46 See 29 CFR Section 2509.75-8 (D-2).
47 80 Fed. Reg. at 21958.
16
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valuation functions necessary and appropriate to plan or account
administrative or operational functions or integral to the
offering, reporting and communication of investment products, are
not fiduciary investment advice.
G. The Department should remove unnecessary and burdensome
elements of
the Principal Transaction Exemption The fixed income market is
largely a principal market, with firms like Schwab either holding
bonds in inventory to satisfy customer demand or being willing to
go out to the market on a “riskless principal” basis to obtain or
sell a bond to meet a client’s order. This occurs whether a client
orders a bond on his or her own online48 using self-directed tools,
calls a representative to place an order, or receives a
recommendation from a representative. In addition, the principal
market has the advantage of being a long-tested model which has
consistently provided efficiencies and access to multiple market
participants and thus reliable liquidity. While reliable liquidity
has historically been one of the benefits of the principal markets,
since the financial crisis we have seen many firms reduce their
willingness to buy or hold fixed income products, thus reducing
market liquidity. By further restricting the ability for firms to
act as liquidity providers, there is the potential that retirement
plan participants will be forced to sell their fixed income
retirement holdings into a less favorable market environment. As
such, it is imperative that firms be able to maintain the ability
to act as principal in the fixed income market for retirement
accounts. The proposed principal trading exemption (the “PT
Proposal”)49 could bar access by plans and IRAs to important
categories of securities that are generally considered staples of a
well-diversified investment portfolio. By prescribing only a short
list of investments that may be bought and sold on a principal
basis,50 the PT Proposal would deny plans and IRAs from holding
securities that may be unavailable for purchase or sale on an
agency basis or available only at a worse price. Foremost among the
commonly and appropriately held assets excluded by the PT Proposal
are municipal securities, agency debt securities and brokered
certificates of deposit. In addition to harming the retirement plan
participants and IRA holders it was intended to help, the
prescriptive approach of the PT Proposal is also inconsistent with
a fiduciary standard that rightly obliges firms and advisers to
make recommendations in the best interests of retirement investors.
We also urge the Department to eliminate from the PT Proposal the
requirement that purchases and sales of debt securities subject to
the exemption occur at a price at least as favorable as the
contemporaneous price for the same or a similar security offered by
two ready and willing counterparties that are not affiliates of the
financial institution.51 This requirement would likely
48 See the discussion above in footnote 28. 49 Notice of
Proposed Class Exemption for Principal Transactions in Certain Debt
Securities between Investment Advice Fiduciaries and Employee
Benefit Plans and IRAs, 80 Fed. Reg. 21989 (Apr. 20, 2015). 50 Id.
at 22004.
51 Id. at 22003.
17
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lead to repeated and frustrating attempts to synchronize the
recommendation, client approval and still-valid counterparty prices
in fast- and ever-moving markets. It would have the unintended
consequence of providing worse execution prices and lower liquidity
for retirement accounts than is available in the market generally.
Under the current regulatory structure, market participants are
held to strict standards related to pricing and best execution.
These existing standards have proved effective over the years, and
the PT Proposal would complicate an area that already has effective
regulatory oversight. The PT Proposal should also be amended to
eliminate the requirements that debt securities subject to the
exemption have no more than moderate credit risk and be
sufficiently liquid to permit sale at or near its fair market value
within a reasonably short period of time. “Moderate credit risk” is
too vague to permit uniform implementation and may force firms to
error on the side of caution and deny access to investments readily
available to non-retirement accounts and perfectly appropriate for
some retirement investors. “Sufficiently liquid” is not
implementable due to the focus on fair market value, because the
sale price of any security is, by definition, its fair market value
at the time of sale. A well-regulated fiduciary standard is far
more likely to appropriately balance the risks and rewards of
various investments and protect retirement investors than a complex
set of prescriptive and proscriptive rules that favor certain
qualities (e.g., liquidity) even in products – like highly-rated
bonds intended to be held to maturity – that are intended to serve
different purposes in a well-diversified retirement portfolio. IV.
Implementation Issues – Pragmatic Measures in Light of the
Proposal’s
Complexity
Reasonable Compliance Date. The final rule would become
effective sixty days after publication in the Federal Register, and
the requirements would generally become applicable eight months
from publication of the final rule, subject to certain
exceptions.52 From Schwab’s perspective, this is not enough time.
We urge the Department to extend the compliance deadline to at
least 18 months after the effective date to give Schwab and other
firms an opportunity to carefully implement the complex set of new
requirements. The Proposal would significantly alter the retirement
services landscape with respect to well established practices in
place since 1975. Review of its implications across complex
affiliate structures, analysis of and business determinations with
respect to changes to existing business models, development of
software and technology, revision and renegotiation of existing
contracts as well as drafting of new forms and agreements,
evaluation of relationships with other providers and development of
compliance policies and procedures all will require a material
investment of personnel, resources and technology. Despite the
Department’s articulated goal that established business practices
not be disrupted, it may have seriously underestimated the time and
effort necessary to comply with the new provisions if adopted as
proposed.
52 80 Fed. Reg. at 21950.
18
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Clear Scope of Fiduciary Duty. Schwab is pleased that the
Proposal includes a limitation on the scope of fiduciary duty when
it comes to non-discretionary investment advice under Section
2510.3-21(c). It would be helpful to clarify further that fiduciary
responsibility only applies to the specific context in which
non-discretionary advice is provided: (i) to specific accounts of
the retirement saver and not to other accounts; (ii) within such
accounts, to the specific assets and securities positions for which
the advice is provided and not to other assets and positions; (iii)
at the time of the recommendation and not on an ongoing basis; (iv)
for the specific purpose for which the non-discretionary advice is
provided. In addition to clarifying the scope of fiduciary
obligations for firms as they consider compliance and
implementation, this clarification will also serve well retirement
savers and plans that otherwise would be forced to pay for extended
fiduciary services they do not want or need. Grandfather
Pre-existing Transactions. We appreciate that the Department
proposes relief for pre-existing transactions in the context of the
new proposed “Best Interest Contract” exemption. This relief
recognizes that investment providers may have provided services
prior to the applicability date of the new provisions without
considering themselves ERISA fiduciaries or may have entered into
transactions prior to such date under the terms of prohibited
transaction exemptions that may, under the final rule, now be
amended. Absent relief, the continued receipt of compensation
associated with such “pre applicability date” transactions could
constitute a prohibited transaction. It would be helpful for the
Department to confirm that such transition relief covers
compensation received after the effective date resulting from the
following common practices prior to the effective date:
• Compensation received as a result of prior investment advice
provided to a retirement saver, without differentiation based on
the manner of delivery (whether in person or through a
computer).
• Compensation received resulting from recommendations acted
upon prior to the effective date regarding management of retirement
assets, such as referrals to investment advisors or investment
advisory solutions (Advice Programs).
• Compensation received resulting from ongoing administrative
actions necessary to implement investment instructions received
prior to the effective date, such as “rebalancing” portfolio
functions and investments made as part of an automatic savings and
investment program or dividend reinvestment program.
Negative Consent to Agreement Amendments Required by the
Proposal. Many service providers such as Schwab provide services to
a significant number of retirement plans, participants and
beneficiaries and IRA accounts. For example, Schwab currently
custodies approximately 3.2 million retail IRAs. Even assuming the
Department extends the compliance date and grandfathers existing
arrangements, the costs, resources and time allocation necessary to
determine which retirement products and services will continue to
be offered, evaluate the agreements governing such IRAs to
determine whether amendments will be necessary, and obtain client
consent to any such amendments, will be very large. The Department
should allow a negative consent approach, whereby plan sponsors and
retirement savers receive notification
19
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and disclosure of changes to their agreements, including notice
that they will be deemed to have consented to such changes through
their continued use of the service provider’s products and services
and that they can terminate such services without penalty if they
object to the amendment. The Department has approved or allowed
this approach in other contexts and should do so here as well.53 I.
Conclusion Retirement savers are entitled to investment advice in
their best interest at a reasonable price. This is Schwab’s
business model today. We support the Department’s objective to
assure this basic fiduciary protection for all retirement savers.
Schwab’s proposed changes are designed to ensure that in protecting
retirement savers from conflicts of interest, final rules do not
inadvertently harm them by unduly restricting the transmission of
important information and guidance to plan sponsors, participants
and beneficiaries, and IRA owners. In addition to protecting
retirement savers, the goal must be to facilitate informed
investing and retirement decisions by preserving choice and access
to a wide range of self-directed tools and Advice Programs that
meet individual needs. Schwab appreciates the opportunity to
comment on the Proposal and may provide additional comments
following the Department’s hearing. We welcome the opportunity to
work with the Department more on this critically important
initiative, and would be pleased to respond to questions or provide
any additional information. Should you have any questions, please
contact the undersigned. Very truly yours, Christopher Gilkerson
Senior Vice President and General Counsel Charles Schwab & Co.
Inc. 415-667-0979 [email protected] Gail B. Mayland
Vice President and Associate General Counsel Charles Schwab &
Co., Inc. 330-908-4512 [email protected]
53See, e.g., DOL Advisory Opinion 97-16A (May 22, 1997).
20
mailto:[email protected]:[email protected]
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Exhibit 1 (proposed changes to existing draft in redline)
Section I--Best Interest Contract Exemption for Recommendations
of Advice Programs [Tracks BIC] (a) In general. ERISA and the
Internal Revenue Code prohibit fiduciary advisers to employee
benefit plans (Plans) and individual retirement plans (IRAs) from
receiving compensation that varies based on their investment
recommendations. Similarly, fiduciary advisers are prohibited from
receiving compensation from third parties in connection with their
advice. This exemption permits certain persons who provide
investment advice to Retirement Investors, and their associated
financial institutions, affiliates and other related entities, to
receive such otherwise prohibited compensation as described below.
(b) Covered transactions. This exemption permits Advisers,
Financial Institutions, and their Affiliates and Related Entities
to receive compensation for services provided in connection with
recommending an Advice Program a purchase, sale or holding of an
Asset by a Plan, participant or beneficiary account, or IRA, as a
result of the Adviser's and Financial Institution's advice to any
of the following “Retirement Investors:” (1) A participant or
beneficiary of a Plan subject to Title I of ERISA with authority to
direct the investment of assets in his or her Plan account or to
take a distribution; (2) The beneficial owner of an IRA acting on
behalf of the IRA; or (3) A plan sponsor as described in ERISA
section 3(16)(B) (or any employee, officer or director thereof) of
a non-participant-directed Plan subject to Title I of ERISA with
fewer than 100 participants, to the extent it acts as a fiduciary
who has authority to make investment decisions for the Plan. As
detailed below, parties seeking to rely on the exemption must
contractually agree to adhere to Impartial Conduct Standards in
rendering advice regardingwhen recommending Advice ProgramsAssets;
warrant that they have adopted policies and procedures designed to
mitigate the dangers posed by Material Conflicts of Interest;
disclose important information relating to fees, compensation, and
Material Conflicts of Interest; and retain documents and data
relating to investment recommendations regarding Assetof Advice
Programs. The exemption provides relief from the restrictions of
ERISA section 406(a)(1)(D) and 406(b) and the sanctions imposed by
Code section 4975(a) and (b), by reason of Code section
4975(c)(1)(D), (E) and (F). The Adviser and Financial Institution
must comply with the conditions of Sections II-V and III to rely on
this exemption. (c) Exclusions. This exemption does not apply if:
(1) The Plan is covered by Title I of ERISA, and (i) the Adviser,
Financial Institution or any Affiliate is the employer of employees
covered by the Plan, or (ii) the Adviser or Financial Institution
is a named fiduciary or plan administrator (as defined in ERISA
section 3(16)(A)) with respect to the Plan, or an affiliate
thereof, that was selected to provide advice to the Plan by a
fiduciary who is not Independent; (2) The compensation is received
as a result of a transaction in which the Adviser is acting on
behalf of its own account or the account of the Financial
Institution, or the account of a person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or
under common control with the Financial Institution (i.e., a
principal transaction); (3) The compensation is received as a
result of investment advice to a Retirement Investor generated
solely by an interactive Web site in which computer software-based
models or applications provide investment advice based on personal
information each investor supplies through the Web site without any
personal interaction or advice from an individual Adviser (i.e.,
“robo advice”); or (4) The Adviser (i) exercises any discretionary
authority or discretionary control respecting management of the
Plan or IRA assets involved in the transaction or exercises any
authority or control
21
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respecting management or disposition of the assets, or (ii) has
any discretionary authority or discretionary responsibility in the
administration of the Plan or IRA. Section II--Contract, Impartial
Conduct, and Other Requirements (a) Contract. Prior to any
investment in the recommended Advice Programrecommending that the
Plan, participant or beneficiary account, or IRA purchase, sell or
hold the Asset, the Adviser and Financial Institution enters into a
written investment management contract with the Retirement Investor
that incorporates the terms required by Section II(b)-(e). (b)
Fiduciary. The written contract affirmatively states that the
Adviser and Financial Institution are fiduciaries under ERISA or
the Code, or both, with respect to any investment recommendations
to the Retirement Investorrecommending the Advice Program. (c)
Impartial Conduct Standards. The Adviser and the Financial
Institution affirmatively agree to, and comply with, the following:
(1) When providing a recommendation investment advice to the
Retirement Investor regarding the Advice ProgramAsset, the Adviser
and Financial Institution will provide investment advicea
recommendation that is in the Best Interest of the Retirement
Investor (i.e., advice that reflects the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent
person would exercise based on the investment objectives, risk
tolerance, financial circumstances, and needs of the Retirement
Investor, without regard to the financial or other interests of the
Adviser, Financial Institution or any Affiliate, Related Entity, or
other party); (2) When providing a recommendation investment advice
to the Retirement Investor regarding the Advice ProgramAsset, the
Adviser and Financial Institution will not recommend an Advice
ProgramAsset if the total amount of compensation anticipated to be
received by the Adviser, Financial Institution, Affiliates and
Related Entities in connection with the recommended Advice Program
purchase, sale or holding of the Asset by the Plan, participant or
beneficiary account, or IRA, will exceed reasonable compensation in
relation to the total services they provide to the Retirement
Investor; and (3) The Adviser's and Financial Institution's
statements about the Advice ProgramAsset, fees, Material Conflicts
of Interest, and any other matters relevant to a Retirement
Investor's investment decisions, will not be misleading. (d)
Warranties. The Adviser and Financial Institution affirmatively
warrant the following: (1) The Adviser, Financial Institution, and
Affiliates will comply with all applicable federal and state laws
regarding the rendering of the investment advice, the
recommendation of the Advice Programpurchase, sale and holding of
the Asset, and the payment of compensation related to the purchase,
sale and holding of the Assetinvestments under the Advice Program;
(2) The Financial Institution has adopted written policies and
procedures reasonably designed to mitigate the impact of Material
Conflicts of Interest and ensure that its individual Advisers
adhere to the Impartial Conduct Standards set forth in Section
II(c); (3) In formulating its policies and procedures, the
Financial Institution has specifically identified Material
Conflicts of Interest and adopted measures to prevent the Material
Conflicts of Interest from causing violations of the Impartial
Conduct Standards set forth in Section II(c); and (4) Neither tThe
Financial Institution will compensate Advisers under the same
formula for all Advice Programs the Financial Institution makes
available to Retirement Investors so that no Adviser will have a
financial incentive to recommend one Advice Program over another.
In addition, neither the Financial Institution nor (to the best of
its knowledge) any Affiliate or Related Entity uses quotas,
appraisals, performance or personnel actions, bonuses, contests,
special awards, differential compensation or other actions or
incentives to the extent they would tend to encourage individual
Advisers to make recommendations that are not in the Best Interest
of the Retirement Investor. Notwithstanding the foregoing, the
contractual warranty set forth in this Section II(d)(4) does not
prevent the Financial
22
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Institution or its Affiliates and Related Entities from
providing Advisers with differential compensation based on
investments by Plans, participant or beneficiary accounts, or IRAs,
to the extent such compensation would not encourage advice that
runs counter to the Best Interest of the Retirement Investor (e.g.,
differential compensation based on such neutral factors as the
difference in time and analysis necessary to provide prudent advice
with respect to different types of investments would be
permissible). (e) Disclosures. [See Section III.] (f) Prohibited
Contractual Provisions. The written contract shall not contain the
following: (1) Exculpatory provisions disclaiming or otherwise
limiting liability of the Adviser or Financial Institution for a
violation of the contract's terms; and (2) A provision under which
the Plan, IRA or Retirement Investor waives or qualifies its right
to bring or participate in a class action or other representative
action in court in a dispute with the Adviser or Financial
Institution. Section III--Disclosure Requirements [New Language]
(a) Prior to or at the time the investment management contract for
the Advice Program is offered to the Retirement Investor, the
Adviser or Financial Institution must – (1) Provide the Retirement
Investor with the brochure required by Advisers Act Rule 204-3; and
(2) Unless otherwise provided in the brochure, furnish the
Retirement Investor with a written description of the firm’s
Adviser compensation practices relating to Advice Programs which
includes compensation rates for the Advice Programs the Financial
Institution makes available to the Adviser. Section IV--Disclosure
to the Department and Recordkeeping [Tracks BIC] (a) EBSA
Disclosure. Before receiving compensation in reliance on the
exemption in Section I, the Financial Institution notifies the
Department of Labor of the intention to rely on this class
exemption. The notice will remain in effect until revoked in
writing by the Financial Institution. The notice need not identify
any Plan or IRA. (b) Data Request. The Financial Institution
maintains the data that is subject to request pursuant to Section
IX in a manner that is accessible for examination by the Department
for six (6) years from the date of the transaction subject to
relief hereunder. No party, other than the Financial Institution
responsible for complying with this paragraph (b), will be subject
to the taxes imposed by Code section 4975(a) and (b), if
applicable, if the data is not maintained or not available for
examination as required by paragraph (b). (c) Recordkeeping. The
Financial Institution maintains for a period of six (6) years, in a
manner that is accessible for examination, the records necessary to
enable the persons described in paragraph (d) of this Section to
determine whether the conditions of this exemption have been met,
except that: (1) If such records are lost or destroyed, due to
circumstances beyond the control of the Financial Institution, then
no prohibited transaction will be considered to have occurred
solely on the basis of the unavailability of those records; and (2)
No party, other than the Financial Institution responsible for
complying with this paragraph (c), will be subject to the civil
penalty that may be assessed under ERISA section 502(i) or the
taxes imposed by Code section 4975(a) and (b), if applicable, if
the records are not maintained or are not available for examination
as required by paragraph (d), below. (d) (1) Except as provided in
paragraph (d)(2) of this Section, and notwithstanding any
provisions of ERISA section 504(a)(2) and (b), the records referred
to in paragraph (c) of this Section are unconditionally available
at their customary location for examination during normal business
hours by: (A) Any authorized employee or representative of the
Department or the Internal Revenue Service;
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(B) Any fiduciary of a Plan that engaged in a purchase, sale or
holding of an Assetinvested in an Advice Program after receiving a
recommendation described in this exemption, or any authorized
employee or representative of such fiduciary; (C) Any contributing
employer and any employee organization whose members are covered by
a Plan described in paragraph (d)(1)(B), or any authorized employee
or representative of these entities; or (D) Any participant or
beneficiary of a Plan described in paragraph (B), IRA owner, or the
authorized representative of such participant, beneficiary or
owner; and (2) None of the persons described in paragraph
(d)(1)(B)-(D) of this Section are authorized to examine privileged
trade secrets or privileged commercial or financial information, of
the Financial Institution, or information identifying other
individuals. (3) Should the Financial Institution refuse to
disclose information on the basis that the information is exempt
from disclosure, the Financial Institution must, by the close of
the thirtieth (30th) day following the request, provide a written
notice advising the requestor of the reasons for the refusal and
that the Department may request such information. Section
V--Definitions [Tracks BIC] For purposes of these exemptions:
(a) “Advice Program” means any program or arrangement where a
registered investment adviser agrees in writing with a Retirement
Investor to provide discretionary or nondiscretionary advice
including but not limited to an eligible advice arrangement under
ERISA section 408(g) and a “wrap fee program” defined in Rule 204-3
of the Investment Advisers Act of 1940.
(b) “Adviser” means an individual who: (1) Is a fiduciary of a
Plan or IRA solely by reason of the provision of investment advice
described in ERISA section 3(21)(A)(ii) or Code section
4975(e)(3)(B), or both, and the applicable regulations, with
respect to the recommendation of an Advice ProgramAssets involved
in the transaction; (2) Is an employee, independent contractor,
agent, or registered representative of a Financial Institution; and
(3) Satisfies the applicable federal and state regulatory and
licensing requirements of insurance, banking, and securities laws
with respect to the covered transaction. (bc) “Affiliate” of an
Adviser or Financial Institution means-- (1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the Adviser or
Financial Institution. For this purpose, ``control” means the power
to exercise a controlling influence over the management or policies
of a person other than an individual; (2) Any officer, director,
employee, agent, registered representative, relative (as defined in
ERISA section 3(15)), member of family (as defined in Code section
4975(e)(6)) of, or partner in, the Adviser or Financial
Institution; and (3) Any corporation or partnership of which the
Adviser or Financial Institution is an officer, director or
employee or in which the Adviser or Financial Institution is a
partner. (c) An “Asset,” for purposes of this exemption, includes
only the following investment products: Bank deposits, certificates
of deposit (CDs), shares or interests in registered investment
companies, bank collective funds, insurance company separate
accounts, exchange-traded REITs, exchange-traded funds, corporate
bonds offered pursuant to a registration statement under the
Securities Act of 1933, agency debt securities as defined in FINRA
Rule 6710(l) or its successor, U.S. Treasury securities as defined
in FINRA Rule 6710(p) or its successor, insurance and annuity
contracts, guaranteed investment contracts, and equity securities
within the meaning of 17 CFR 230.405 that are exchange-traded
securities within the meaning of 17 CFR 242.600. Excluded from this
definition is any equity security that is a security
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future or a put, call, straddle, or other option or privilege of
buying an equity security from or selling an equity security to
another without being bound to do so. (d) an Iinvestment advice
recommendation is in the “Best Interest” of the Retirement Investor
when the Adviser and Financial Institution providing the
advicerecommendation act with the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent
person would exercise based on the investment objectives, risk
tolerance, financial circumstances, and needs of the Retirement
Investor, without regard to the financial or other interests of the
Adviser, Financial Institution or any Affiliate, Related Entity, or
other party. (e) “Financial Institution” means the entity that
employs the Adviser or otherwise retains such individual as an
independent contractor, agent or registered representative and that
is: (1) Registered as an investment adviser under the Investment
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or under the laws of
the state in which the adviser maintains its principal office and
place of business; (2) A bank or similar financial institution
supervised by the United States or state, or a savings association
(as defined in section 3(b)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1813(b)(1)), but only if the advice resulting in the
compensation is provided through a trust department of the bank or
similar financial institution or savings association which is
subject to periodic examination and review by federal or state
banking authorities; (3) An insurance company qualified to do
business under the laws of a state, provided that such insurance
company: (A) Has obtained a Certificate of Authority from the
insurance commissioner of its domiciliary state which has neither
been revoked nor suspended, (B) Has undergone and shall continue to
undergo an examination by an Independent certified public
accountant for its last completed taxable year or has undergone a
financial examination (within the meaning of the law of its
domiciliary state) by the state's insurance commissioner within the
preceding 5 years, and (C) Is domiciled in a state whose law
requires that actuarial review of reserves be conducted annually by
an Independent firm of actuaries and reported to the appropriate
regulatory authority; or (4) A broker or dealer registered under
the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.). (f)
“Independent” means a person that: (1) Is not the Adviser, the
Financial Institution or any Affiliate relying on the exemption,
(2) Does not receive compensation or other consideration for his or
her own account from the Adviser, the Financial Institution or
Affiliate; and (3) Does not have a relationship to or an interest
in the Adviser, the Financial Institution or Affiliate that might
affect the exercise of the person's best judgment in connection
with transactions described in this exemption. (g) “Individual
Retirement Account” or “IRA” means any trust, account or annuity
described in Code section 4975(e)(1)(B) through (F), including, for
example, an individual retirement account described in section
408(a) of the Code and a health savings account described in
section 223(d) of the Code. (h) A “Material Conflict of Interest”
exists when an Adviser or Financial Institution has a financial
interest that could affect the exercise of its best judgment as a
fiduciary in recommending an Advice Program rendering advice to a
Retirement Investor regarding an Asset. (i) “Plan” means any
employee benefit plan described in section 3(3) of the Act and any
plan described in section 4975(e)(1)(A) of the Code. (j)
“Proprietary Product” means a product that is managed by the
Financial Institution or any of its Affiliates. (k) “Related
Entity” means any entity other than an Affiliate in which the
Adviser or Financial Institution has an interest which may affect
the exercise of its best judgment as a fiduciary. (l) “Retirement
Investor” means--
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(1) A participant or beneficiary of a Plan subject to Title I of
ERISA with authority to direct the investment of assets in his or
her Plan account or to take a distribution, (2) The beneficial
owner of an IRA acting on behalf of the IRA, or (3) A plan sponsor
as described in ERISA section 3(16)(B) (or any employee, officer or
director thereof), of a non-participant-directed Plan subject to
Title I of ERISA that has fewer than 100 participants, to the
extent it acts as a fiduciary with authority to make investment
decisions for the Plan. (m) “Third-Party Payments” mean sales
charges when not paid directly by the Plan, participant or
beneficiary account, or IRA, 12b-1 fees and other payments paid to
the Financial Institution or an Affiliate or Related Entity by a
third party as a result of the purchase, sale or holding of an
Asseta transaction involving plan assets in connection with an
Advice Program by a Plan, participant or beneficiary account, or
IRA. Section VI--Data Request [New language] Upon request by the
Department, a Financial Institution that relies on the exemption in
Section I shall provide, within a reasonable time, but in no event
longer than six (6) months, after receipt of the request, the
following information for the preceding six (6) year period: (a)
Referrals to Advice Programs. At the Financial Institution level,
for each Advice Program offered to Retirement Investors, for each
quarter: (1) The aggregate dollar amount invested and the number of
Plan, participant or beneficiary accounts, or IRAs enrolled in each
Advice Program; and (2) The gross management fee received by the
Financial Institution and any Affiliate in connection with the
investment in each Advice Program. (b) Outflows from Advice
Programs. At the Financial Institution level for each Advice
Program offered to Retirement Investors, for each quarter: (1) The
aggregate number of accounts closed by a Plan, participant or
beneficiary account, or IRA, and the assets associated with the
closings; and (2) The revenue received by the Financial Institution
and any Affiliate in connection with the account closings under
each Advice Program. (c) Overall Enrollment. At the Financial
Institution level for each Advice Program available at any time
during each quarter: (1) The aggregate value of Plan, participant
or beneficiary accounts, or IRAs, at the end of such quarter; and
(2) The revenue received by the Financial Institution and any
Affiliate in connection with the accounts enrolled in Advice
Programs during such quarter for each Advice Program disaggregated
by Advice Program; and
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Exhibit 2 (proposed changes to existing rule text in
redline)
Sec. 2550.408g-1 Investment advice--participants and
beneficiaries. (a) In general. (1) This section provides relief
from the prohibitions of section 406 of the Employee Retirement
Income Security Act of 1974, as amended (ERISA or the Act), and
section 4975 of the Internal Revenue Code of 1986, as amended (the
Code), for certain transactions in connection with the provision of
investment advice to participants and beneficiaries. This section,
at paragraph (b), implements the statutory exemption set forth at
sections 408(b)(14) and 408(g)(1) of ERISA and sections 4975(d)(17)
and 4975(f)(8) of the Code. The requirements and conditions set
forth in this section apply solely for the relief described in
paragraph (b) of this section and, accordingly, no inferences
should be drawn with respect to requirements applicable to the
provision of investment advice not addressed by this section. (2)
Nothing contained in ERISA section 408(g)(1), Code section
4975(f)(8), or this regulation imposes an